Today's Buy Opportunity: Adidas

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If you read the thesis for purchasingNational Bank of Greece (NYSE: NBG) , my previous "11 O'Clock Stock," then you know that I don't expect Greece to default on its debt obligations. The European Union, led by Germany, has stepped up to bail out Greece to the tune of up to -- cue Dr. Evil -- one trillion dollars! Should the situation continue to deteriorate in the EU's other debt-plagued nations, including Spain and Portugal, I expect the EU to step up with assistance there as well.

While this policy helps those individual member states avert a financial meltdown, it's not good for the EU's broader balance sheet, or its common currency, the euro. A weakened euro diminishes European spending power globally -- but it's a definite boon for European exporters and other companies on the continent that sell worldwide. Those companies get a revenue and earnings boost when they translate sales in relatively stronger currencies (the dollar, the yuan, the real, and more) back into newly weakened euros.

Winners among the losersOne company that has already benefited from this trend is Germany's Adidas (Pink Sheets: ADDYY.PK). Company sales in the second quarter, while up a robust 11% on a currency-neutral basis, were boosted an incredible 19% in euro terms. This benefit also flowed through to the company's profitability, where gross margin increased by almost 4 percentage points, and operating margin rose by almost 6 percentage points.

While it's normally prudent to strip out currency effects and expect them to balance out over time, I think Adidas will be a much longer-term beneficiary because of my bearish outlook on the euro. I don't think investors have baked that benefit into the company's valuation just yet.

More than a currencyStill, Adidas's recent success stems from more than simple currency gains. The company is rapidly growing its brand and business in Latin America and China, thanks to a strong presence in soccer -- the world's most popular sport. It's also achieved a turnaround in its Reebok division, on the back of its popular EasyTone walking shoes and new ZigTech cross trainers. Once left for dead, sales of Reebok products were up an impressive 16% in the second quarter.

When you combine improved profitability (thanks to a weaker euro) with growing sales in emerging markets and a successful Reebok division, you get a company that looks like it's worth at least $30 per ADR. That value is more than 15% higher than today's price -- a healthy discount to pay for one of the world's best-known brands.

That's not only attractive on a stand-alone basis, but also when you compare the Adidas valuation to its peers:

You could reasonably argue that Nike and UnderArmour should trade at premiums to Adidas. Nike's a bigger company with an even better-known brand, and UnderArmour's a smaller company that should see faster growth. But the valuation discrepancy between Nike and Adidas, as you'll see below, is historically wide. And UnderArmour is not outgrowing Adidas by a meaningful amount -- particularly after you bake in the aforementioned currency effects.

So what about that relationship between Nike and Adidas? If you look over the trailing 15-year period, you'll see that Nike's EV/sales ratio has been approximately 1.5 times higher than Adidas's, and its EV/EBITDA ratio approximately 1.1 times higher. Today, those ratios are 1.9 and 1.2 times, respectively. Does Nike deserve that much of a premium given Adidas' fast-growing sales and the ongoing revival in its previously profit-challenged Reebok division? I certainly don't think so. As the market picks up on this discrepancy, we should see Adidas's multiples expand.

All told, Adidas is a high-quality company trading for an attractive valuation that offers total global exposure. That's why it's today's "11 O'Clock Stock," and why we'll be buying shares.

Don't forget to either hop in and ask a question, or leave a thought on Adidas in the comments box below. We're giving away a subscription to Stock Advisor for the best comment on each"11 O'Clock Stock" pick this week! To see rules for the Stock Advisor giveaway, click here.

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I have to disagree with you on your thesis. Although I agree with you that adidas is a good brand and all, but buying a stock based on primarly a devaluation of the euro is something i couldn't do. I have a name that is much better than ADDYY.

That name is NKE, yes Nike. Why do I like NKE better than ADDYY because it is a better brand. If you go up to anyone and say which shoes would you rather have NKE or ADDYY I bet they would say NKE. It is like asking someone wether they want a coke or a rc cola. NKE has incredible pricing power as people will pay up to wear air jordans, and Lebron airmax. That is something that ADDYY does not have. NKE also has one of the best management teams in the world, and huge presence in Asia. More and more Chinese are moving into the middle class and want nice things and that is where NKE will capitalize. NKE is also just trading at 15x next years earnings and has a 1.5% yeild to boot. With NKE you don't have to worry about valuations in currency as this stock is growing. While the stock market as a whole is still off by 30% from its 2007

I have to disagree with you on your thesis. Although I agree with you that adidas is a good brand and all, but buying a stock based on primarly a devaluation of the euro is something i couldn't do. I have a name that is much better than ADDYY.

That name is NKE, yes Nike. Why do I like NKE better than ADDYY because it is a better brand. If you go up to anyone and say which shoes would you rather have NKE or ADDYY I bet they would say NKE. It is like asking someone wether they want a coke or a rc cola. NKE has incredible pricing power as people will pay up to wear air jordans, and Lebron airmax. That is something that ADDYY does not have. NKE also has one of the best management teams in the world, and huge presence in Asia. More and more Chinese are moving into the middle class and want nice things and that is where NKE will capitalize. NKE is also just trading at 15x next years earnings and has a 1.5% yeild to boot. With NKE you don't have to worry about valuations in currency as this stock is growing. While the stock market as a whole is still off by 30% from its 2007 high, Nke set a new all time high%

I have been impressed with a lot of the stocks picked for this 11 o clock series and this is no exception. This made it on my radar for the same reasoning: the decline in the euro imroves their competitive postition and profits.

Part of the reason Nike has higher margins could be due to addidas' Retail segment which I think is a great growth driver for this company(and has posted great results this year). On the other hand the Retail segment has had the result of adding considerable cyclicality to overall results, leading to added risk if there is a prolonged slowdown in Europe. Continued growth within the segment may also lead to further disparities between EV/Sales and EV/EBITDA due to different business models.

The Reebok segment had been a drag on results since ther acquisition but its results have only tracked slightly ahead of the company this year. Although Reebok's new products seem interesting it seems too soon to tell the direction the segment will head long term. If this is the beginning of a longterm improvement it speaks well for the company.

All this being said I see your valuation as spot on, the company does seem to have some upside and should perform well over the next 5-10 years, especially with continued Euro pressure.

Adidas is a soccer juggernaut, with sales expecting to balloon thanks to the recent world cup. As the leader in all things football (the no hands on the ball kind), Adidas will grow along with the game. After seeing a man cry on TV after the U.S. lost to Ghana, I am now convinced more than ever that soccer has nowhere to go but up in the U.S. and Canada.

Should we buy based on Euro's recent struggles? Given the current valuation, I would say so. They recently reached their goal of 35% sales in emerging markets, and a whiff of a recovery in Europe will give the stock a boost. They are giving Nike a run for their money in China, and are market leaders in places like India and Japan. They will only grow in Latin America, given the popularity of football there (again, no hands), and Reebok is coming along, which represents a big opportunity for Adidas going forward for both sales and margins.

"If you read the thesis for purchasing National Bank of Greece (NYSE: NBG), my previous "11 O'Clock Stock," then you know that I don't expect Greece to default on its debt obligations. The European Union, led by Germany, has stepped up to bail out Greece to the tune of up to -- cue Dr. Evil -- one trillion dollars! Should the situation continue to deteriorate in the EU's other debt-plagued nations, including Spain and Portugal, I expect the EU to step up with assistance there as well."

Just because Greece has a bailout from the EU, does not prevent a debt default. Things are not good in Greece as this article will attest:

I think Adidas might be a sleeper pick. For anyone familiar with fantasy football, we all know a sleeper is a pick that is often over looked initially but ends up with huge numbers. Jordan doesn't play basketball anymore so his shoes won't sell as much as they use to and Lebron took a huge PR hit so I believe there will be a decline in his as well. Speaking of PR hits, let's not forget Tiger Woods who is Nike's golden boy. While we're talking about Golf, let's not forget that Adidas also owns TaylorMade which is the number one driver is golf today and is the player's choice. Adding that to the fact that Adidas has better running shoes in the Reebok Reezig and the Adidas Bounce, I see them as an underdog that could be on the rise.

The 11 o'clock stock picks have been very enticing and this is no exception. I really like the international exposure that Adidas has and think it's a quality brand. With the possibility of the euro devaluing, it adds to the positive thesis. It stacks up well with Nike although brand recognition here in the states isn't as significant.

With that said, I'll put my money behind the UnderArmour brand. I coach a lot of youth soccer and basketball and many of the kids are sold on the UA brand. With UA branching out into specialty shoes besides the quality clothing they offer, I think this brand is going places fast.

I just visited a Cabela's hunting/fishing/outdoor store and guess which brand was very well represented there. It wasn't Nike or Adidas. . . UA is capturing a huge market with it's outstanding apparel line among a crowd that spends a lot of $$ every year. They offer a wide range of outstanding goods and I expect outstanding returns from this company.